BAPU CORP. et al v. CHOICE HOTELS INTERNATIONAL,INC.

Filing 39

OPINION. Signed by Judge William J. Martini on 9/8/08. (gh, )

UNITED STATES DISTRICT COURT F O R THE DISTRICT OF NEW JERSEY B A P U CORP., HARSHAD S. PATEL, Plaintiffs, v. OPINION CHOICE HOTELS INTERNATIONAL, INC., H O N . WILLIAM J. MARTINI Defendant. M A S T E R FILE: 07-CV-5938 (W J M )

M ic h a el R. Curran E -4 Greenbriar Court C lif to n , NJ 07012 (C o u n se l for Plaintiffs) J o h n P. Mueller B a lla rd , Spahr, Andrews & Ingersoll, LLP P la z a 1000 M a in Street S u ite 500 V o o rh e e s, NJ 08043 (C o u n s e l for Defendant)

W I L L I A M J. MARTINI, U.S.D.J.: D e f e n d a n t files a motion to reconsider this Court's order granting Plaintiffs' m o tio n to vacate an arbitration award, denying Defendant's motion to confirm the award, a n d denying Defendant's motion to dismiss Plaintiffs' complaint. The Court's reasoning b e h in d this order was that Defendant failed to initiate the arbitration within the applicable s ta tu te of limitations. Defendant now argues the Court overlooked that this statute of

lim ita tio n s evaluation was a question for the arbitrator, not the Court. The Court agrees. The Court further finds that the arbitration award is valid, despite Plaintiffs' arguments to th e contrary, which the Court finds unpersuasive. Accordingly, Defendant's motion to r e c o n s id e r , motion to confirm the arbitration award, and motion to dismiss Plaintiffs' c o m p la in t are GRANTED, and Plaintiffs' motion to vacate the arbitration award is D E N IE D . I. F A C T S AND PROCEDURE T h is suit concerns the validity of an arbitration award in a contract dispute. Plaintiffs in this case breached a contract with Defendant. Defendant initiated arbitration p u rsua n t to the contract and secured an award. The parties now dispute the arbitration's v a lid ity. A. T h e Contract

In 2000, the two Plaintiffs, Bapu Corporation and Bapu President Harshad Patel, e n t e re d into a franchise contract with Defendant, Choice Hotels International, Inc. (First A m . Compl. ¶¶ 1, 6, 7; Aff. of Harshad Patel ¶ 1; Decl. of John Mueller Ex. B.) The c o n tra c t provided Plaintiffs the right to operate a building that Plaintiffs were then leasing a s a Quality Inn hotel. (Patel Aff. ¶ 4; Mueller Decl. Ex. B.) Under the contract, P la in tif f s had to renovate the building before they could operate it as a Quality Inn. (Mueller Decl. Ex. B Addendum No. 1.) The contract required Plaintiffs to complete this

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re n o v a tio n by November 30, 2000.1 T h e contract also contained two relevant provisions regulating disputes between th e parties. First, the contract contained an arbitration clause requiring arbitration of "any c o n tro v e rs y or claim arising out of or relating to this Agreement." (Mueller Decl. Ex. B ¶ 2 2 .) Second, the contract stated that "[n]either party may file a claim . . . arising out of or r e la tin g to this Agreement after 3 years from the date that the claim arose, unless ap p lica b le law states a shorter statute of limitations." (Mueller Decl. Ex. B ¶ 20(k).) B. T h e Breach

A s of the deadline for renovations on November 30, 2000, Plaintiffs had not c o m p lete d the required renovations. (Mueller Decl. Ex. C.) Defendant then sought to u n ila te ra lly extend the deadline. On May 8, 2001, Defendant sent Plaintiffs a letter p u rp o rtin g to extend the time for Plaintiffs to begin the renovations until September 28, 2 0 0 1 . (Mueller Decl. Ex. C.) Plaintiffs deny having ever received this letter and sent no re sp o n s e . (Patel Aff. ¶ 20(d)(iii).) Having not received a response, Defendant on O c to b e r 16, 2001, sent Plaintiffs another letter offering to extend the renovation deadline f o r another three months, until January 16, 2002, if Plaintiffs agreed to pay a $5,000 e x te n sio n fee. (Mueller Decl. Ex. C.) Plaintiffs declined this offer. (Pls.' Mem. of Law

The contract stated that "[y]ou agree to make the following changes and additions to upgrade the Hotel to meet our standards or to cure existing deficiencies before entering th e QUALITY INN System, but in no event later than November 30, 2000." (Mueller D e c l. Ex. B Addendum No. 1.) 3

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in Opp'n to Def.'s Mot. to Dismiss 4.) D e f en d a n t accordingly began the process of terminating the contract. Between 2 0 0 2 and 2004, Defendant sent Plaintiffs letters on three separate occasions titled "Notice o f Default." (Mueller Decl. Exs. D, E, F.) These letters demanded that Plaintiffs c o m p lete their promised renovations and threatened termination of the contract if P la in tif f s did not. (Mueller Decl. Exs. D, E, F.) Plaintiffs did not complete the promised re n o v a tio n s . Finally on September 15, 2004, Defendant sent Plaintiffs a letter titled " N o tice of Termination." (Mueller Decl. Ex. G.) In the letter, Defendants purported to term inate the contract and claimed to be entitled to damages. (Mueller Decl. Ex. G.) C. T h e Arbitration

O n October 19, 2006, Defendant served Plaintiffs with a demand for arbitration. (Mueller Decl. Ex. H.) The demand for arbitration sought "recovery of damages . . . s u s ta in e d due to a breach by Respondents of a franchise agreement that required R e sp o n d e n ts to complete changes and additions to upgrade the hotel." (Mueller Decl. Ex. H .) P la in tif f s objected to the arbitration on several grounds, including on the grounds th a t the arbitration was barred by the applicable statute of limitations. On April 23, 2007, P la in tif f s filed a letter with the arbitrator stating that they would suffer prejudice by p a rtic ip a tin g in the arbitration. (Mueller Decl. Ex. Q.) Plaintiffs argued, inter alia, " C h o ic e could succeed in committing a deception upon the AAA, having used these

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p ro c e ed in g s to avoid dismissal as to personal jurisdiction and the limitations period." (Mueller Decl. Ex. Q.) On June 10, 2007, Plaintiffs filed another letter with the arbitrator s ta tin g that "the alleged contract automatically terminated within six months of signing so th a t there is a statute of limitations bar to this matter." (Mueller Decl. Ex. S.) In a prehearing opinion, the arbitrator acknowledged Plaintiffs' statute of lim ita tio n s argument but refused to address it before the hearing. The arbitrator stated as f o l lo w s : T h is dispute is heavily fact based on one that cannot be d is p o s e d of by way of a preliminary motion at this time. The is s u e s of statute of limitations and laches are pertinent issues, b u t they will have to wait for another day. I cannot "judge" or " d e c id e " this case on the papers presented. (Ex. W at 29.) U ltim a tely, the arbitrator ruled for Defendant. The arbitrator found Plaintiffs in b re a ch of the contract and awarded Defendant $142,560 as damages pursuant to a liq u id a te d damages clause in the contract. (Cross-Pet. to Confirm Arbitration Award Ex. A 11.) The arbitrator did not address Plaintiffs' statute of limitations argument. D. T h is Suit

P la in tif f s believing that the arbitrator lacked jurisdiction over this dispute, they f ile d this suit. In the complaint, Plaintiffs generally requested relief from both the a rb itra tio n award and contract. (Compl. ¶¶ 24­32.) Plaintiffs also appear to allege that

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D e f e n d a n t breached the contract, and Plaintiffs seek resulting damages.2 T h e parties then filed the instant motions, which essentially hinge upon the validity o f the arbitration award. Plaintiffs filed a motion to vacate the arbitration award. Most im p o rta n tly, Plaintiff argued that the arbitrator lacked jurisdiction over this dispute b e c au s e the three-year period provided by the contract in which to file claims had expired b ef o re Defendant filed its demand for arbitration. (Pls.' Mem. of Law in Opp'n to Def.'s M o t to Dismiss 24­25.) Plaintiffs also appeared to make six other arguments in favor of v a c atin g the arbitration award: (1) that Defendant did not properly serve Plaintiffs with a d e m a n d for arbitration, (2) that the arbitrator was biased for Defendant, (3) that the a r b itr a to r engaged in misconduct by failing to postpone the hearing upon Plaintiffs' re q u e st, (4) that the arbitrator exceeded his authority by interpreting the contract to c o n ta in a term it could not be reasonably said to have contained, (5) that the arbitrator m is in te rp re te d a liquidated damages provision in the contract, and (6) that the arbitrator im p ro p e rly relied on hearsay evidence. (Pls.' Mem. of Law in Supp. of Cross-Mot. to V a c ate 18­27.) In response, Defendant filed a motion to dismiss Plaintiffs' claims as b e in g completely resolved by the arbitration and a motion to confirm the arbitration a w a rd . T h e Court granted Plaintiffs' motion to vacate the arbitration award and denied

In the complaint's prayer for relief, Plaintiffs request "a judgment for $ 2 ,0 0 0 ,0 0 0 .0 0 in lost franchise revenue due to the wrongful conduct of Defendant in v io la tio n of the New Jersey covenant of good faith and fair dealing." (Compl.) 6

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D e f en d a n t's motions to dismiss and to confirm the award. The Court reasoned that D e f e n d a n t's contract claim accrued in 2000 or shortly after, when Plaintiffs failed to c o m p l e te the renovation, and that the three-year period of limitations in the franchise ag ree m en t thus barred Defendant from initiating arbitration in 2006. Because the Court f o u n d this argument dispositive of the motions, the Court did not address Plaintiffs' r e m a in i n g arguments. D e f en d a n t now moves for reconsideration of the Court's order vacating the a r b itr a tio n award and denying Defendant's motion to confirm the award and to dismiss P la in tif f 's complaint. Defendant argues that the Court overlooked that the parties agreed in the franchise contract to submit all questions of whether a dispute is arbitrable to the arb itrator, including the question of whether the contract's period of limitations bars a rb itr a tio n .3 T h e Court agrees. Furthermore, the Court holds that Plaintiffs' remaining a rg u m e n ts impugning the arbitration award's validity to be without merit. Accordingly, th e Court grants Defendants motion for reconsideration, motion to confirm the arbitration a w a rd , and motion to dismiss Plaintiffs' complaint, and denies Plaintiffs' motions to v a c ate the arbitration award.

Defendant has not clearly raised this argument before. Defendant claims this is b e c au s e the Court considered Plaintiffs' statute-of-limitations argument sua sponte and th u s that Defendant had opportunity to respond to it. This is simply untrue; Plaintiffs c lea rly raised this statute of limitations argument both before the arbitrator and before this C o u rt . 7

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II.

D IS C U S S IO N L o c a l Rule of Civil Procedure 7.1(i) allows a party to motion for a district court to

re c o n sid e r an order or judgment. One ground for granting such a motion, the relevant g ro u n d here, is where the court has overlooked "dispositive factual matters or controlling d e c is io n s of law." See United States v. Compaction Sys. Corp., 88 F. Supp. 2d 339, 345 (D .N .J. 1999). A. T h e Three Year Limitations Period

A s explained above, Defendant argues that the Court overlooked that the parties c o n tra c tu a lly submitted to the arbitrator the question of whether the three-year period of lim ita tio n s bars arbitration. The Court agrees. A r b itra tio n is at essence a matter of contract. United Steelworkers of Am., AFLC IO -C L C v. Rohm & Haas Co., 522 F.3d 324, 331 (3d Cir. 2008). Parties are bound to a rb itra te -- ra th e r than litigate--their disputes only to the extent that they have co n trac tually agreed to do so. See Gay v. CreditInform, 511 F.3d 369, 386 (3d Cir. 2 0 0 7 ). The question of whether the parties have contractually submitted a dispute to a rb itra tio n -- th e question of arbitrability--is generally an issue for judicial determination b y a district court, with one exception. Id. at 387. The exception is that like any other m a tter, parties may contractually agree to submit the question of arbitrability itself to arb itratio n . First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942­43 (1995). H e re , in determining that a contract dispute between the parties was not arbitrable

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a f te r three years the Court overlooked that the parties had agreed in the franchise a g r e e m e n t to submit the question of arbitrability itself to arbitration. The franchise a g re e m e n t's arbitration provision provides that disputes will be sent to arbitration "in a c co rd a n c e with the Commercial Arbitration Rules of the American Arbitration A s s o c ia tio n ." (Mueller Decl. ¶ 22.) One of these Commercial Arbitration Rules, s p e c if ic a lly Rule R-7, provides that "[t]he arbitrator shall have the power to rule on his or h e r own jurisdiction, including any objections with respect to the existence, scope or v a lid ity of the arbitration agreement." The parties' agreement to arbitrate any contract d isp u tes under these Commercial Arbitration Rules thus includes an agreement to submit the question of arbitrability to the arbitrator.4 Accordingly, it was improper for the Court to substitute its judgment for the arbitrator's judgment with respect to whether the parties h a d agreed to arbitrate disputes more than three years old. B e c a u se the question of arbitrability was for the arbitrator, and not this Court, to d e c id e , Plaintiffs must present some other valid ground on which to attack the arbitration. Plaintiffs indeed do present six other arguments to support their motion to vacate the a rb itra tio n . The Court, however, finds these unpersuasive, as the Opinion will now e x p la in .

Indeed, other courts have uniformly held that agreements submitting to arbitration u n d e r American Arbitration Rules implicitly include agreements to submit the question of a rb itra b ility to the arbitrator. E.g., Contec Corp. v. Remote Solution Co., 398 F.3d 205, 2 0 8 (2d Cir. 2005). 9

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B.

W h eth er Defendant's Improper Service of the Demand for Arbitration J u s tifie s Vacating the Award

P la in tif f s claim that Defendant did not properly serve them with the demand for a rb itra tio n and that this justifies vacating the award. Plaintiffs note that while Defendant p ro p e rly served Plaintiff Harshad Patel with a demand for arbitration, Defendant served a c o rp o ra tio n located in Georgia also called Bapu Corporation, instead of the Bapu C o rp o ra tio n that is a Plaintiff in this case, which is located in New Jersey. Plaintiffs c la im that this is fraud, which justifies vacating the award. T h e Court disagrees. Plaintiffs are correct that courts may vacate an arbitration aw ard if it was procured by some kind of fraud. 9 U.S.C. § 10(a)(1). Here, however, th e re is no evidence of fraud. Rather Defendant appears to have made an honest mistake in serving a company in Georgia with the same name as Plaintiff Bapu Corporation. Nor w a s there any prejudice from this mistake; Plaintiff Patel is Plaintiff Bapu's President, so P la in tif f Bapu had immediate notice of the demand to arbitrate through Plaintiff Patel. The Court finds no evidence of fraud and thus no justification for vacating the award u n d e r § 10(a)(1). C. W h e th e r the Arbitrator Was Biased

P la in tif f s claim that the arbitrator was biased and that this justifies vacating the a w a rd . Plaintiffs note that the arbitrator failed to realize and disclose to the parties that the law firm at which he is a partner represents a hotel company of which Defendant's C E O is a board member. 10

T h e Court disagrees that this constitutes grounds to vacate an arbitration award. Courts may vacate an arbitration award if the arbitrator was evidently partial. 9 U.S.C. § 1 0 (a )(2 ). Such evident partiality exists where "a reasonable person would have to co n clud e that the arbitrator was partial to [one] party to the arbitration.'" HSM Constr. S erv s., Inc. v. MDC Sys., Inc., 239 F. App'x 748, 753 (3d Cir. 2007). This standard re q u ire s proof of circumstances "powerfully suggestive of bias." Id. Here, the arb itrator's connection to Defendant's CEO is not "powerfully suggestive of bias." There is no evidence in the record that the arbitrator even knew of this tangential connection; in d e e d , the arbitrator appears to have honestly conducted a conflict check without d is c o v e rin g this connection. Indeed, this tangential connection is too attenuated to give o ff even an appearance of bias. Accordingly, the arbitrator's connection to Defendant's C E O does not constitute grounds to vacate the arbitration award. D. W h e th e r the Arbitrator's Refusal to Postpone the Arbitration Hearing J u s tifie s Vacating the Award

P la in tif f s claim that the arbitrator improperly refused to postpone the December 1 3 , 2007, arbitration hearing upon Plaintiffs request and that this justifies vacating the a w a rd . Plaintiffs do not describe this request, but it appears that Plaintiffs are referring to a n email that Plaintiffs sent to the arbitrator on December 12, 2007, the night before the a rb itratio n requesting a one day continuation. The arbitrator denied this request. T h is refusal does not constitute grounds to vacate an arbitration award. Courts m a y vacate an arbitration award if the arbitrator unreasonably refuses to postpone an 11

a rb itra tio n hearing. 9 U.S.C. § 10(a)(3). In determining whether to vacate an award for s u c h a refusal, courts will examine whether there was any reasonable basis for it and w h e th e r the party seeking postponement advanced "sufficient cause." See Scott v. P ru d e n tial Sec., Inc., 141 F.3d 1007, 1016 (11th Cir. 1998). Here, the arbitrator certainly h a d a reasonable basis to refuse to postpone the hearing: Plaintiffs did not request p o stp o n e m e n t until the night before the hearing. Furthermore, Plaintiffs fail to put forth a n y sufficient cause to explain why postponement was necessary or even desirable.5 A c c o rd in g ly, the arbitrator's refusal to postpone the hearing is not grounds to vacate the a rb itra tio n award. E. W h e th e r the Arbitrator's Interpretation of the Contract Justifies V a c a tin g the Award

P la in tif f s argue that the arbitrator misinterpreted the franchise agreement and that th is justifies vacating the award. Specifically, Plaintiffs point to the arbitrator's comment th a t liquidated damages would be appropriate in this contractual setting because "[t]he c o st to lock up a particular [hotel] market would be impossible to calculate." Plaintiffs a rg u e that the contract does not actually contain a "lock up" provision, by which Plaintiffs a p p e ar to refer to a contractual provision that would prevent Defendant from granting f ra n c h ise s within a certain distance from Plaintiffs' franchise. Plaintiffs claim that this m is in te rp re ta tio n constitutes grounds to vacate the arbitration award.
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Plaintiffs argue that "[t]he Arbitrator was requested to adjourn the December 13, 2007 hearing to December 14, 2007 to rule on evidentiary objections." Plaintiffs fail to explain why the arbitrator could not have ruled on those objections at the December 13, 2007 hearing. 12

T h e Court disagrees. As discussed above, interpretation of the c o n tra c t-- in c lu d in g the scope of its arbitration clause--is a task for the arbitrator, not the C o u rt. The Court will not revisit the arbitrator's interpretation. Furthermore, it is not c le a r whether the arbitrator was implying that the franchise agreement contained a "lock u p " provision, as Plaintiffs call it, or was merely noting as a practical matter that the o p e n in g of a franchise precludes opening of a nearby franchise. This does not constitute g ro u n d s to vacate the arbitration award. F. W h e th e r the Arbitrator's Calculation of Liquidated Damages Justifies V a c a tin g the Arbitration Award

P lain tiff s claim that the arbitrator miscalculated liquidated damages, under a liq u id a te d damages provision in the contract, and that this justifies vacating the arbitration a w a rd . Plaintiffs make three arguments to support this claim. The Court finds each u n p e rs u a siv e . F irs t, Plaintiffs argue that "[t]he provision caps liquidated damages at $100,000" w h ile the arbitrator awarded more than this amount. Plaintiffs refer to a provision in the c o n tra c t that states as follows: "If the Hotel is sold during the first five (5) years of the A g r e e m e n t to a bona fide purchaser and the purchaser does not enter into a Franchise A g re e m e n t with us for the Hotel or does not assume the Agreement, liquidated damages w ill not exceed $100,000 so long as liquidated damages are paid in certified funds within 1 0 days from the sale of the Hotel." This provision is clearly inapplicable for several re a so n s . For example, there is no evidence that Plaintiffs have paid any liquidated 13

d a m a g e s in certified funds and certainly not within ten days from the sale of the Hotel. Thus there is no $100,000 cap on liquidated damages. S e c o n d , Plaintiffs argue that the arbitrator miscalculated the amount of liquidated d a m a g e s. Understanding Plaintiffs' argument requires mention of three previously u n d is c u ss e d provisions in the franchise agreement dealing with liquidated damages in the e v e n t that Defendant terminates the contract. Most importantly, the contract provides that " [ w ]h e re the termination occurs before the Opening Date . . . you will pay us within 30 d ays after the termination, as liquidated damages and not as a penalty for the premature te rm in a tio n , the product of (x) the Rentable Rooms, multiplied by (y) $40.00, multiplied b y (z) the Remaining Months (but not to exceed 36 months)." The contract further d e f in e s "Remaining Months" as "the number of months until the next date that you could h a v e terminated this Agreement." Finally, the contract provides that either party had the rig h t to terminate the contract "on the 5th, 10th or 15th anniversary of the Opening Date." When calculating damages, the arbitrator determined that because Plaintiffs never opened th e hotel, their right to terminate the contract was at least five years away and thus c a lc u la te d the "Remaining Months" of the contract by following the thirty-six month cap c o n ta in e d in the liquidated damages provision. Plaintiffs' argument, however, is that "as th e re was no Opening Date, the date [for calculating the remaining months] would have to be the date that would have been Opening Date." Plaintiffs conclude that "[a]s D e f e n d a n t claimed it terminated the Agreement January 16, 2005, `Remaining Months'

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w o u ld have been no more than January 2005 to December 1, 2000--ten months." T h is argument is wholly without merit or sense. There is no basis for redefining th e term "Opening Date" as the date on which the hotel should have opened, as opposed to defining it as the day on which it actually opened. Indeed, the contract clearly defines " O p e n in g Date" as "the date that you begin to rent sleeping rooms to the public at the H o tel under this Agreement." If no opening date occurs, then Plaintiffs never actually p o s s e ss e d a right to terminate the contract, and the contract's thirty-six month cap on liq u id a te d damages applies. This is precisely what the arbitrator correctly did. Third, Plaintiffs argue that the arbitrator manifestly disregarded the applicable s ta te law, Maryland law, in determining that the liquidated damages clause was valid. This argument too is wholly without merit. Courts interpreting Maryland law have sp ec ifica lly approved of Defendant's liquidated damages provision in other cases. There is thus no basis for this Court to hold that the arbitrator manifestly disregarded Maryland la w in upholding the liquidated damages provision. G. W h e th e r the Arbitrator Improperly Relied on Hearsay Evidence

F in a lly, Plaintiffs argue that the arbitrator improperly relied on hearsay evidence. But "[i]t is well-established, however, that arbitrators are not required to adhere to the F e d e ra l Rules of Evidence, including the rule against hearsay." Railoa v. Union Bank of S w itz ., LLC, 230 F. Supp. 2d 355, 360 (S.D.N.Y. 2002). Thus the arbitrator's reliance on h e a rs a y does not justify vacating the arbitration award.

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III.

C O N C L U SIO N In conclusion, the Court finds on reconsideration that the arbitration award is valid

a n d that Plaintiffs' challenges to it are without merit. Accordingly, Defendant's motion f o r reconsideration, motion to dismiss Plaintiffs' complaint as barred by the arbitration a w a rd , and motion to confirm the award are GRANTED, and Plaintiffs' motion to vacate th e arbitration award is DENIED. An Order accompanies this Opinion.

s/W illiam J. Martini WILLIAM J. MARTINI, U.S.D.J. D a te d : September 8, 2008

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